Thursday, January 21, 2010

Book Review (#2 of 2010)

Nudge by Richard H. Thaler and Cass B. Sunstein. This was one of The Economist magazine's Books of the Year in 2008. Thaler and Sunstein are behavioral economists who show several examples of how applying behavioral economics can lead to more optimal outcomes. Given that some of President Obama's advisers are steeped in Chicago school behavioral economics this seems to be an ideal read.

The authors coin the phrase "libertarian paternalism." They believe that government can leave people with the freedom of choice but "nudge" them in making socially optimal decisions. Taxing gasoline is one old-school simple example. You can still buy it, but you're nudged to buy less.

An example more characteristic of their approach is what the city of Chicago did with Lakeshore Drive. The city simply painted lines on the pavement that are evenly spaced and then become closer together over a distance. When you're driving over them at a constant speed it gives the sensation of accelerating. This causes drivers to think they're going too fast and to slow down. Drawing fake speed bumps is also used in some towns. You're still free to drive the speed limit but you're "nudged" to slow down.

Thaler and Sunstein apply their studies to health care reform, social security privatization, the "privatization" of marriage, losing weight, saving energy and more.

The idea of the free market not leading to ideal outcomes is controversial among many on the right as is the idea of paternalistic "nanny state" government correcting those outcomes. Thaler and Sunstein are aiming for liberty while acknowledging that maybe we'd all be better off since people are not always rational agents (a fact that is a cornerstone of behavioral economics).

I find some of their wit gets old after a while. Some of their ideas are very practical, others seem to be a stretch. Almost all of it (except for the simple examples above) is politically impossible. Their examples came in very handy in the class I am teaching, though.

I give it 3.5 stars out of 5.

And now I will fulfill my New Years resolution to read my older books in order of purchase.

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